March 31, 2009

Am I being dense?

France has threatened to walk out of the G20 summit in London if agreement is not reached on the important issues. Bravo!

But wait. What does France want agreement on?

"I am absolutely determined, and President Sarkozy has said it loud and clear, that we actually eradicate non-cooperative centres and tax havens," [finance minister Christine Lagarde] said.

"I know that Chancellor Merkel is very much on that line, I know that Gordon Brown has said that old tax havens have nothing to do with this new world.

"Well, we need to deliver on that and we need to be extremely united and strong."

Now can someone explain to me what offshore tax havens and financial centers have to do with our current mess?

I suppose some would say this is a tactic to divert attention from all the other important issues on which there will definitely not be an agreement on. If they can at least agree to put the blame on offshore havens who, after all, will not be sitting around the table, France and the others can walk away claiming victory. Will the media really be taken in?

France has been receiving advice from Rob Emanuael. Never let a crisis go to waste. France is using this crisis to push its position on tax havens knowing full well that its policy prescription have absolutely nothing to do with solving the recession.

Even Brasil's Squid talks about tax havens with no comprehension about what these mean.

Some helpful words on the benefict of those complainers: maybe the fact that some trades are feasible only because of the low costs due to tax haven origin and those may cause some imbalances on the forex markets and balance of payments. But in this case, the chinese behaviour is something that one might be more worried. Why does a country, any, holds more than US$ 2 Tri in FX reserves?

Anyway, tax havens have absolutely nothing to do with securitization & etc. By the way, although Spain laws prohibit this kind of operation (MBS, ABS...), their banks are also in deep trouble.

Really Mr. Rodrik ... once again, I'm amazed at the systematic irrationality of otherwise smart economists ... do you really expect politicians (and French ones at that!) to eschew the tried and tested strategy of marginalise, scapegoat and then criminalise any constituency it wants, whenever it wants? Since when did reason trump populism?! ;-)

I'm quoting myself here, or at least quoting myself quoting someone else, but the best metaphor for this that I have heard:

'One finance official characterises this attitude as akin to that of a pugilist in a bar brawl. “You wait until a fight breaks out and then take a swing at the guy you have always wanted to hit,” the official says. “Whether or not he had anything to do with starting the fight is not the point.”'

At least that would great news for the African people. The dictators and corrupt would have to reinvest the stolen public money in Africa...
I know that is not the point. But I don't see the point of Prez Sarko.

I get the impression that Sarkozy has taken home a different message from the crisis. One of Sarkozy's earliest comments was a rather strong renunciation of conventional capitalism. He was suggesting it needed a major overhaul - moreso than was being suggested by others I heard.

Perhaps tax havens aren't the largest issue here, but it's hard to argue that they have any social value. It doesn't make the job of a balancing budgets, or saving up surpluses any easier. Maybe he's throwing the demand in there symbolically, as a kind of proof of good faith.

I think for him this is about much more than fixing the explicit and obvious causes of the crisis.

"will someone please explain to me..." Well, I'm not economist, part of the great unwashed, so no explaining, just for what it's worth.

I wondered whether you were serious in asking the question? In my layman's view the issue concerns the lack of power governments have over large corporations and the need for regulation. But how to regulate when governments are so powerless? You think that breaking banks up is bosh, and you maybe right about that. But how else to go? Marcy Wheeler blogged "They're not tax havens.. They're secrecy havens" http://tinyurl.com/dekw8a
The issue is not simply tax avoidance but avoidance of regulation.

Off shore banking was examined in depth during the Asian Financial crisis. Special Data Dissemination Standards were one reform that to a layman's eye had to do with this problem. In any case the issue of tax havens is certainly an issue development economists examine--and found a significant problem. So I'm just puzzled by your remark. It seems wise acre and not sincere.

I don't think it's anything as complicated as that. What tax havens have do to with the crisis is the last of our president's worries - I believe it's just a matter of getting the spotlight on France and making it look like we have respectable weight in these discussions.

You asked for an explanation of the role tax havens played in the crisis. Well, here are some for starters. The tax havens did not "cause" the crisis, but they contributed powerfully to it. First, they offered what has been called a "get out of regulation free" card to businesses that abuse them. Banks made especial use of this - anecdotally, both the recent GAO report and Tax Research data showed banks to be by far the greatest users of tax havens. Off balance sheet financing was possible without tax havens, but tax havens hugely facilitated this stuff. Second, unhealthy competition on tax and regulation between tax havens, and between them and other jurisdictions, eviscerated and degraded regulations especially in supposedly "onshore" jurisdictions that may have helped staunch the crisis. Third, tax incentives, typically but not always through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system. Fourth, “satellite” tax havens like some Caribbean islands or Britain’s Crown Dependencies are often conduits for illicit and other financial flows, often from developing countries into the wealthy financial centres like London, New York, and these contributed to large-scale macroeconomic imbalances. The entire mainstream economics profession has neglected to measure these vast flows. (see if you can find estimates that include serious estimates of the biggest factor: transfer mispricing. Go on. Take a look) Fifth, one of the most important features of the crisis is that the financial system became frozen as a result of mutual mistrust and impenetrable complexity making it impossible for partners to understand the financial positions of their partners. The secrecy jurisdictions, by giving companies incentives to festoon their financial affairs across multiple jurisdictions, and by covering these affairs in a veil of secrecy, have played a major part in this. Sixth, they provided the ideal situation for all manner of fraudulent business models - such as those offered by Bernie Madoff - to proliferate, adding to the mayhem.

It is important to understand that the City of London and the U.S. (Delaware, Wall Street etc) have major offshore characteristics (see, for example, the Jason Sharman study recently cited in The Economist) and this is where I believe your misunderstanding may be (I guess from the tone of your question that you have an opinion on this): you fall into the trap woven by people like Avinash Persaud saying that the tax havens are only the small vulnerable jurisdictions like Barbados, ignoring e.g. London's offshore characteristics, then saying QED. You'll have to do a lot better than that.
Not only that, but by draining reputable jurisdictions of the tax dollars of their wealthiest citizens and corporations, and by fostering massive capital flight out of developing countries, they have made it so much harder for victims of the crisis to pay to clean up the mess.

I have an idea: why don't you study the tax haven / offshore phenomenon? I mean really study it - spend a few months full time, say, at the very least. They lie at the heart of the global economy, after all: for example, half of all world trade is routed, at least on paper, through tax havens. Then you might be in a better position to pass judgement.

Paris, the most-visited city in the world, is getting clobbered by a sharp downturn in global travel. International passenger arrivals at the city's two airports were down 8.1 percent year-on-year in February, and hotel occupancy rates dropped 10 percent. Even visits to the Eiffel Tower have fallen 7 percent from last year. (Overall, the US Commerce Dept. figures visits by Americans to Europe tumbled 7 percent last year.)

That's putting a big dent in the city's $13.2 billion-a-year hotel and restaurant business, which, along with other tourism-related activities, employs 12.1 percent of the city's population. "It's a catastrophe," says Bertrand LeCourt, president of l'Hôtellerie Familiale, a hotel owners' association.

Empty Rooms and Tables

It's not just sightseers who are staying away. Business travel held up relatively well during 2008, because many conventions and trade shows were planned well in advance. But now it's slumping, too. "February really scared us," said Gérard Cros, owner of the Sport Hotel, a 95-year-old establishment near the Bois de Vincennes that caters to business travelers. Occupancy at the hotel in February was down 10 percent from a year earlier, Cros says.

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Off shore banking was examined in depth during the Asian Financial crisis. Special Data Dissemination Standards were one reform that to a layman's eye had to do with this problem. In any case the issue of tax havens is certainly an issue development economists examine--and found a significant problem. So I'm just puzzled by your remark. It seems wise acre and not sincere.

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